This article was original featured in Private Equity Wire.

Daniel Trentacosta, Global Head of Private Markets & Change for MUFG Investor Services, outlines the challenges that asset managers face in calculating fees, as well as the importance of automation, and the work behind the development of MUFG Investor Services’ fee calculation tool.

Q: Why is calculating fees so difficult?
Daniel Trentacosta (DT): For decades, private market asset managers have relied on back-office teams, manual processes, inconsistent data, and much-dreaded Excel spreadsheets to determine fees. In fact, if you ask 100 asset managers to list their most labor-intensive challenges, it’s a safe bet that most will place “calculating fees” in their Top 5.

Fee calculations can be very complex, data needs to be accurate and clean, and managers have to get it right, every time. Without strong calculation tools, they spend a lot of time and resources inputting information and correcting errors manually.

Now, it’s very difficult to function using manual processes and spreadsheets. The alternatives industry is evolving so quickly that firms need to automate or they’re jeopardizing their futures.

Q: What is changing within the industry and why is automation so important now, as opposed to a few years ago?
DT: The markets are growing at an unprecedented pace. Over the years, manual processes may have been reasonably effective when funds were capitalized by a handful of institutional investors. But the wave of capital from new retail investors, “dry powder” from asset managers, as well as traditional institutional investors, means funds may have a high volume of  calculations. And asset managers are continually developing new fund structures to access that capital. All of which means they need highly automated tools and solutions to manage the capital, funds, and investors, and to simplify and streamline the fee calculation process.

Q: What are some of those new products that you’re seeing?
DT: New semi-liquid, “evergreen” products—blending elements of private and public markets are increasingly being introduced. We’re also seeing many complex fund agreements requiring numerous calculations within a fund. Managers need to ensure they are accurately recording data for fee calculations, and are applying it correctly, to ensure they have the necessary components required for specific calculations.

Q: How are outsourcing firms working with asset managers to address the fee calculation issues, and how much progress is being made?
DT: Everyone recognizes the issue, but there are few effective solutions. We’re seeing some in-house attempts, which can be time-consuming and costly for managers. Outsourcing firms are exploring solutions as well, but very often those tools are too rigid or even include an Excel component. Tech vendors also have developed tools, but these can also be rigid out of the box, or they need to be configured with a full IT lifecycle—starting with requirements and development and running through user acceptance testing and production. All that work can be costly and slow to implement.

Q: What’s unique about MUFG Investor Services solution?
DT: We’ve spent the last seven years building our platform, leveraging a healthy blend of proprietary and partner technology, which gives us a significant advantage. When we walk into a meeting with clients, we’re bringing a solution that is fully automated, scalable and ready to use. The tool is adaptable to a client’s needs and requirements.

We see this as a huge differentiator for asset managers—they need a flexible, streamlined solution that standardizes information and can manage a broad spectrum of fund documents. Onboarding can be done quickly, and once it’s live, it’s straight-through processing with full transparency regarding the calculations.

Q: What are some of the specific advantages?
DT: The tool can configure matching terms found in fund documentation—from basic to complex—and manages specific fund terms, parameters, side letter considerations, and other factors to effectively calculate management fees, carried interest, and hypothetical and realized calculations. The solution handles traditional European-style calculations, along with deal-based and hybrid methodologies, and matches performance fee calculations, including multiple structures, opt in/opt out, carve outs, and mapping rules.

We’ve built an extensive “library” of client fee models—we now have more then 350—which enables the system to process a range of calculations, including waterfall, High Water Mark and hurdle calculations, Internal Rate of Return and time-weighted calculations, and levered or unlevered calculations. The calculation basis includes actively invested capital, commitments, capital called, NAV, GAV, as well as any combination of data that can be mapped and grouped together from the firm’s core accounting and investor platforms.

Q: You mentioned Excel earlier. Does your solution rely on Excel for handling data?
DT: No. The tool eliminates the need for Excel. We use application programming interfaces to standardize data and move it to and from core platforms. Transaction data flows into the model, data is processed, and ledger entries and allocations flow back to core platforms, placing greater controls and audit procedures around the calculation process. The system provides strong reporting outputs that enable fund managers to review data, models and outputs to ensure transparency.

Q: What happens when an asset manager needs a unique model for a new fund structure?
DT: If our existing models or templates do not cover a specific use case, we have a dedicated team that will refine the model and implement additional features to align the calculations with the governing fund documentation.

In fact, our fee calculation team is one of the critical pieces of this solution. They’ve built this platform, they know all its capabilities, and how it interacts with other systems. And they have extensive experience working with Operations and Technology teams to implement and support the system. Fund managers who attempt to build a similar system in-house would need to build all those component pieces,  as opposed to partnering with someone like MUFG Investor Services.

Q: What are the next steps for implementing the tool with clients?
DT: As part of our global client-service model, we’re actively working to deliver this to clients in market centers around the world. We serve clients when and where they do business, which is key to our “follow-the-sun” strategy. We see this as something that fills a void in the marketplace. Clients love this type of flexibility, and in many ways, it’s the ultimate solution.